0x Protocol acts as middleware allowing peer-to-peer transactions of Ethereum-based tokens (ERC20 and ERC721) on a decentralized and distributed network. There a basically two types of exchanges, centralized and decentralized. In a centralized exchange transactions are processed by an intermediary that manages asset liquidity pools and fiat currency, as in traditional banks and brokerages. If a centralized exchange is deactivated, funds may be lost. A decentralized exchange, or DEX, is a peer-to-peer exchange powered by blockchain smart contracts. The DEX facilitates digital asset trading directly on the blockchain where funds are not held by a third party. If a decentralized exchange is deactivated, the user retains their encrypted keys so to not lose their funds. Typical decentralized exchanges require a proprietary central body to maintain protocols. High transaction rates may cause problems for the network and impede order flow.
0x is a permissionless infrastructure protocol that takes the DEX one step further by enabling asset exchange with a suit of Automated Market Maker (AMM) open-source smart contracts. The AMM uses a price adjusted model to respond to market forces and are easily integrated with external smart contracts built on the Ethereum blockchain. 0x uses off-chain orders books via state channels combined with on-chain transaction settlements. Off-chain order books are hosted by nodes on the 0x Protocol network called Relayers. A Relayer earns transaction fees in ZRX, 0x’s native token, by facilitating signaling between market participants. Relayers cite transaction fees and Market Makers (ie Futures Traders) create orders accordingly. Once in agreement, the Market Makers transmits the order to the Relayer who subsequently posts the order to their order book. Orderbooks are used to publicly record the interest between buyers and sellers of a particular asset. Takers (ie Spot Traders) monitor the order book for the Maker order and may fill the order by executing an on-chain Ethereum exchange contract.
The 0x protocol creates a modular network that is more decentralized, secure, and scalable than the traditional DEX. Order books may plug into each other creating greater network liquidity and multiple Interface APIs may also interact with a single Orderbook. Advanced users may also broadcast their orders directly to 0x and interact peer-to-peer.
Commentary: I have launched three 0x Protocol DEX’s. Two were done using the 0x Launch Kit over both the Kovan and Rinkeby Networks. The third I created using SwitchDex over the ETH Mainnet. In all three situations, I had trouble connecting to Orderbooks. The Launch Kit recommends using Infura.io for API keys. This site seems to be very straight forward, but I have negligible coding skills. In order for mass adoption to take place, there will be a need for a more user-friendly application for set-up and frontend use that requires no user coding.